Decision impact statement

Commissioner of Taxation v McWilliam

Court Citation(s):
[2012] FCAFC 105
2012 ATC 20-339
(2012) 89 ATR 845
(2012) 204 FCR 478

Venue: Federal Court of Australia
Venue Reference No: NSD 511 of 2012
Judge Name: Edmonds, Jagot and Robertson JJ
Judgment date: 8 August 2012
Appeals on foot: No
Decision Outcome: Unfavourable to the Commissioner

Impacted Advice

Relevant Rulings/Determinations:

• N/A

Subject References:
Employee share schemes
Employee share schemes and options
Employee share ownership
Share discounts on employee share schemes

Précis

Outlines the ATO response to this case which concerns when does a taxpayer acquires a 'right' under an employee share scheme for the purposes of former Division 13A of the Income Tax Assessment Act 1936 ('ITAA 1936').

Brief summary of facts

In about May 2003, the taxpayer was approached by a director of a public company who proposed that he accept employment with the company. Negotiations ensued in respect of possible terms of employment, including the taxpayer being granted options in the company. It was ultimately agreed between the parties during the negotiation period that the granting of options would be part of the taxpayer's employment package.

On 1 July 2003, the taxpayer commenced employment with the company. No formal employment contract was executed. However, a draft contract given to the taxpayer prior to him starting work included a term granting him a specified number of options

On 3 September 2003, the taxpayer was appointed a director of the company.

On 11 September 2003, the Company Secretary lodged with the Australian Stock Exchange Ltd ('ASX') a notice containing information on the taxpayer's interests in the company. It stated that the taxpayer 'has a right, conditional on shareholder's approval, to be granted options over un-issued shares' in the company.

On 28 November 2003, a resolution was passed at the Annual General Meeting approving the issue of 2,000,000 options to the taxpayer. The contract for the acquisition of the options was executed on 22 December 2003.

Issues decided by the court

The issue before the Full Federal Court concerned whether the taxpayer acquired a 'right' under an employee share scheme for the purposes of former Division 13A of the ITAA 1936 upon acquiring a right to require the employer to issue options to purchase shares, or whether the employee acquired that right only upon the issue of the options under the employee share scheme.

The time at which the 'right' is acquired is relevant for ascertaining the market value of the options and in turn calculating the discount given in relation to the acquisition of the option. Any discount given in relation to a share or right granted under an employee share scheme must be included in the assessable income of the taxpayer in the relevant year.

The Full Court relied on the finding of the Tribunal that the taxpayer had acquired the options on 1 July 2003. On that basis, the Commissioner's appeal was found by the Court to be incompetent as not being on a question of law.

The Full Court also concluded, in the alternative, that if the taxpayer did not acquire the options on 1 July 2003, he nevertheless obtained a contractual right to obtain the options to the shares in the company and the contractual right was a right for the purposes of Division 13A.

ATO view of Decision

The decision of the Full Court was based on the findings of fact made by the Tribunal.

The Full Court's conclusion that if the taxpayer did not acquire the options on 1 July 2003, he nevertheless obtained a contractual right to obtain the options to the shares in the company and that was a right for the purposes of Division 13A, appears predicated on a conclusion that the right to the options was unconditional and not subject to a future event. A conditional right to an option of the kind considered by the Full Court in Fowler v Commissioner of Taxation [2013] FCAFC 69 will not be a Division 13A right.

Division 13A has been repealed so the case has little ongoing significance.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

N/A

Implications on Law Administration Practice Statements

N/A

Legislative References:
Administrative Appeals Tribunal Act 1975 (Cth)
s 44

Income Tax Assessment Act 1936 (Cth)
s 139B
s 139C
s 139CD
s 139DD
s 139FC
s 139FF
s 139G

Case References:
ACP Publishing Pty Ltd v Commissioner of Taxation
(2005) 142 FCR 533
2005 ATC 4151
59 ATR 98

Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue
[2009] HCA 41
(2009) 239 CLR 27
73 ATR 256
2009 ATC 20-134

Commissioner of Stamp Duties (Q) v Livingston
(1964) 112 CLR 12
43 ATC 325

Donaldson v Federal Commissioner of Taxation
[1974] 1 NSWLR 627
74 ATC 4192
4 ATR 530

Fraunschiel v Federal Commissioner of Taxation
[1989] FCA 236
(1989) 89 ATC 4616
(1989) 20 ATR 955

Industry Research & Development Board v Bridgestone Australia Ltd
(2001) 109 FCR 564
47 ATR 469
2001 ATC 4448